Being a real estate professional can be a significant benefit to an owner of rental properties as it allows for rental activities to be treated as non-passive and therefore losses can be deducted on these properties. Otherwise, the losses are suspended until the property is sold.
To qualify as a real estate professional you must:
- Materially participate in a real estate business. The business of renting and leasing realty is a real estate business.
- More than 50% of the personal services you perform in all businesses during the year must be performed in real estate businesses in which you materially participate.
3) Your personal services in material participation real property businesses during the year must amount to more than 750 hours. You can’t count any work you perform in your capacity as an investor.
If you have multiple properties, you may not be able to qualify as a real estate professional unless you elect to treat all your rental real estate interests as a single activity. If you make the election, it applies both for purposes of qualifying you as a real estate professional, and for all other purposes of the Passive activity rules. And, generally speaking, the election is irrevocable.
If you don’t make the election, then you have to take qualifying rules and apply then to each property and most likely you won’t qualify as a real estate professional, especially as you increase the number of properties you own.
Material participation in an activity means involvement in the operations of the activity on a regular, continuous, and substantial basis. If a taxpayer passes one of the following tests, IRS accepts that as establishing material participation in an activity:
- Participating in the activity for more than 500 hours in the tax year
- Participating in the activity if the taxpayer’s participation is substantially all the participation in that activity by any individuals
- Participating in the activity for more than 100 hours in the tax year, if nobody else participated more
- Participating significantly in the activity, if participation in all “significant participation” activities for the tax year exceeds 500 hours
- Having materially participated in the activity during any five of the ten tax years before the year at issue
- With respect to personal service activities, having materially participated in the activity for any three year before the year at issue
7) Showing regular, continuous and substantial participation on the basis of the relevant facts and circumstances, but only if more than 100 hours of participation during the tax year can be shown